The Recession Question, Are We Already In One?

The Recession Question, Are We Already In One?

Posted On July 27, 2022 12:30 pm

So much ink has been spilled throughout the past few weeks over whether we will enter a recession, or if we are already in one that I’m starting to think we should be trading ink futures.

A lot of the discussion surrounds semantics; does two quarters of declining GDP qualify? We will get that reading on Thursday. Or do we need to wait until the National Bureau of Economic Research, which looks at a number of monthly indicators — such as employment, personal income, and industrial production – or we just go with the Biden Administration’s latest proclamation which simply stated “we don’t think we will go into a recession, and we don’t even know how to define it anyway.”

I hate to admit it, but Biden’s take may be the most accurate. First of all, we need to always distinguish between Main Street and Wall Street. The recent bear market is the first time since the financial crisis there has been some alignment between the pain felt between labor and capital.

I invite you to join Options360 for a full 30 days for just $19.

Beyond that, there is still a widespread inequality and the impact of soaring inflation is continuing to punch consumers in the gut at the register. If you are in a lower income bracket, you’re always in a recession; it’s just gotten worse over the past year. If you are in the upper income bracket and own assets, you have simply seen a pinch on your discretionary spending. The cost of corn flakes is higher while prices of Rolexes are down, prices of those luxury items can’t go much higher.

It’s good we have washed out most of the froth from SPACs, over the top valuations, crypto, and trying to normalize interest rates to prevent mal-investments. Even the pull forward of digitalization due to the pandemic has been wiped out, as evidenced by today’s report from Shopify (SHOP) which is slashing jobs and said “we got it wrong regarding the growth path” for online businesses.

Now we head into one of the most data heavy weeks on record. Earnings from big tech names like MSFT, GOOGL, AAPL, FB, as well as FOMC where the Fed will let us know their next move in their fight against inflation.

These are the names that will determine whether we have a true recession in terms of a macro decline in earnings power, or if we are just experiencing necessary reversion to the mean after binging on the government largesse in the form of fiscal stimulus.

Options360 is still leaning towards new lows which we estimate to be made by the end of the summer. We are holding a combination of positions such as bullish in XBI, bearish in JPM, and a hedge in VIX, which will keep us on our toes and ready to react nimbly to whatever the market throws our way.

Get a more in depth breakdown of these trades and many more like it when you join us today!

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.